Merger Model IB Technical Questions & Correct Answers/ Graded A+

1. Why would a company want to acquire another company? : A company would acquire another company if it believes it will earn a good return on its investment - either in the form of a literal ROI, or in terms of a higher Earnings Per Share (EPS) number, which appeals to shareholders. There are several reasons why a buyer might believe this to be the case: • The buyer wants to gain market share by buying a competitor. • The buyer needs to grow more quickly and sees an acquisition as a way to do that. • The buyer believes the seller is undervalued. • The buyer wants to acquire the seller's customers so it can up-sell and crosssell products and services to them. • The buyer thinks the seller has a critical technology, intellectual property, or other "secret sauce" it can use to significantly enhance its business. • The buyer believes it can achieve significant synergies and therefore make the deal accretive for its shareholders. Walk me through a basic merger model 2 : A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and it determines whether the buyer's EPS increases or decreases afterward. Step 1 is making assumptions about the acquisition - the price and whether it was done using cash, stock, debt, or some combination of those. Next, you determine the valuations and shares outstanding of the buyer and seller and project the Income Statements for each one. Finally, you combine the Income Statements, adding up line items such as Revenue and Operating Expenses, and adjusting for Foregone Interest on Cash and Interest Paid on Debt in the Combined Pre-Tax Income line; you apply the buyer's Tax Rate to get the Combined Net Income, and then divide by the new share count to determine the combined EPS What's the difference between a merger and an acquisition